The business behind the show

Relativity, Fortress sued by investor in Sony slate deal

February 8, 2012 | 5:26
pm

A film company that invested in a Sony Pictures co-financing fund arranged by Relativity Media is suing both Relativity and Wall Street giant Fortress Investment Group for fraud and breach of contract.

The suit, filed Wednesday in Los Angeles Superior Court by Aramid Entertainment Fund, claims the Sony fund, which provided more than $500 million in capital to co-finance movies since 2008, was shut down late last year in a manner that benefited both Fortress and Relativity but deprived Aramid of at least $44 million.

Aramid claims to have invested $22 million in the film-finance fund set up by Relativity, for which financing was arranged by Citi. The so-called "Beverly slate deal" allowed Relativity to choose from among most of Sony's productions to co-finance up to 45 movies over a five-year period. Films it has co-financed included the Adam Sandler comedy "Grown Ups" and the Kevin James comedy "Paul Blart: Mall Cop."

According to the suit, Fortress, an investment firm with more than $43 billion under management, was given access to Aramid's private financial information, including details of the Beverly slate arrangement, in order to consider buying some of the film company's assets. The two firms did not end up making a deal, but Aramid alleges that Fortress improperly used that information to later buy into the Beverly deal.

Late last year, the lawsuit states, Fortress arranged to buy out Citi's interest in the Beverly slate, which was worth $226.7 million, for just $113.5 million, as the bank wanted to exit the movie deal. At the same time, Fortress is alleged to have convinced Sony Pictures to end the deal, which was supposed to allow Beverly to keep funding movies through 2013, in December 2011.

To end the deal early, Sony allegedly paid Beverly no more than $214 million, which the lawsuit claimed saved the studio up to $222 million in payments that would eventually be owed on the co-financed movies.

The arrangement allowed Fortress to make a gross profit of approximately $96.1 million, the suit claims.

In order to convince Relativity, which earned a producer fee of $1 million plus 2% of gross receipts for each co-financed movie, Fortress paid it $14.5 million late last year, the lawsuit claims. While that's allegedly $15 million to $30 million less than Relativity would have ultimately made under the deal, the independent studio, led by outspoken Chief Executive Ryan Kavanaugh, was under financial strain last year. Following several box-office disappointments, its relationship with former backer Elliott Management ended and it took out a loan from Colbeck Capital to continue operations.The lawsuit claims that Relativity had reached "functional insolvency [which] made Kavanaugh and Relativity particularly receptive to overtures from Fortress."

The lawsuit claims that Aramid was cut out and received no return on its original $22-million investment, which would have been worth at least $44 million if the Beverly fund had continued making movies. The suit claims that Relativity represented to Aramid throughout the fall that Beverly would co-finance several upcoming Sony films, including "21 Jump Street" and a new Adam Sandler comedy, "I Hate You Dad." Instead, Relativity was allegedly working with Fortress and Sony to end the Beverly deal early.

A spokesman for Fortress did not respond to a request for comment. Spokesmen for Relativity and Sony declined to comment.

Aramid was previously involved in litigation related to film investments made by financier David Bergstein and construction magnate Ron Tutor.